Time for action on public sector pensions

Finally a senior politician has had the guts to tell the truth about public sector pensions: they are unfair and unaffordable.

The surprise is that it is not a senior Tory who has spoken out but Liberal Democrat leader and Deputy Prime Minister Nick Clegg.

Such honesty is likely to earn him the opprobrium of union leaders who have their heads firmly stuck in the last century.

But every private sector worker and tax-paying pensioner should be grateful that at last there appears to be a political will to confront this thorny issue.

The figures are frightening. According to the pre-Budget forecast, produced by the Office For Budget Responsibility (OBR), our liability to public sector pensions is increasing by £26bn a year.

But even this could be a massive underestimate. Philip Booth, of the Institute of Economic Affairs, suggests the true figure could be £37bn higher because the Government sums make too many rosy assumptions.

And, he says, the OBR report underestimates the total liability to public sector pensions by £400bn.

Rather than the staggering £770bn quoted in its report, the real figure is closer to a terrifying £1,170bn. There is worse to come. The OBR warns that changes in demographics means that net expenditure on public sector pensions (the difference between money collected and money paid out) will increase by 20% a year in real terms from 2009/10 to 2014/15.

In five years' time, these pensions will cost every household £4,000 a year. Almost 90% of public sector workers receive a final salary pension, compared with 16% in the private sector.

Some 3.4m public sector workers are in schemes where the pensions are paid by current contributions and taxes. Membership of public sector schemes grew by 28% between 1991 and 2008, while private sector membership fell by 45%.

What's more, those with public sector pens ions pa y jus t 9.4% National Insurance, while those in the private sector - who must fund their own pensions - pay 11%.

Pension rights that have been built up are legally protected, which is as it should be. But future pension accrual can be cut. Workers could be moved onto average salary schemes, retirement ages raised, accrual rates reduced, employee contributions increased and enrolment into the scheme delayed for three or four years after employment starts. All have happened in the private sector.

The unions will fight changes tooth and nail. The TUC says the average public sector pension is £7,000 a year, but that most get less than £5,000 a year - though they no doubt get a tax-free lump sum on top of this.

Don't they realise that the average private sector worker can only dream of an inflation-linked pension of £5,000 a year? To get this they would have to build a pension fund of £138,000, according to Hargreaves Lansdown.

That would mean saving £139 a month for 40 years and keeping their fingers crossed that their investments increased in value. Even the TUC must realise this is beyond the means ofms of private sector workers, who are expected, through their taxes, to fund public sector pensions.

By allowing this state of affairs to continue we are building a future where a pensioner aristocracy will be drawn from the public sector, while private sector workers will be reduced to the role of serfs. Even if we tackle this now, we will still be handing our children and grandchildren a mountainous debt.